Oil, Power, Politics and Finance

by Bill Barclay

Petroleum and its products, from gasoline to bunker fuel to makeup, is the most valuable good in world trade. Oil provides almost one-third of world energy supplies,1 is the primary business for four of the 16 largest companies in the world (eclipsed only by the finance sectors’ seven) and is the most actively traded commodity futures contract in the world.2 And this year oil seems to be the driving force behind financial market volatility: the correlation between the S&P 500 and oil prices is over .75 year-to-date.

This correlation between oil prices and the U.S. stock market is unusual. So, what is happening — and what does it mean for the future?

There are three new factors in the political economy of oil that are reshaping the economics and the politics of petroleum and petroleum products.

First, there is the emergence of the U.S. as the swing producer, a role occupied by Saudi Arabia for the last several decades. This is the result of a 2004 to 2014 expansion in the production of light tight oil (LTO), the product of fracking.

Second, is the decision by OPEC, primarily driven by Saudi Arabia, not to reduce production in response to the collapse of prices from $115/barrel less than two years ago to around $30/barrel today. This decision results from the Saudi experience in losing market share to other OPEC exporters during previous agreements to freeze or reduce production.

Third, the slowing of economic growth in the largest petroleum importing economy, China, means that market shares lost will be harder to regain. Total Saudi crude exports and Chinese crude imports are roughly equal, although, of course, not all Saudi exports go to China.3

It may be useful to start an analysis by speculating on the Saudi strategy in the new oil political economy. While the strategy may not be completely clear, there are at least two significant factors that must be entering their calculations. On the one hand, as the low-cost producer at less than $11/barrel, the kingdom can be profitable even at current price levels. Likely of more importance, the kingdom does not want to surrender market share to another low-cost producer, Iran, the fifth largest producer and a political-religious opponent because of different geopolitical interests and versions of Islam. In addition, Iran also has the largest fleet of very large crude carriers (VLCC), giving them a potential competitive advantage.

The second significant change facing the Saudis, the shift of the U.S. from a net deficit petroleum country to a net surplus — and thus a potential competitor for market share — is probably the most significant change in the equation of the political economy of oil. This shift is particularly important because light tight oil production is likely to be more price elastic than traditional OPEC and Russian production. LTO extraction has a shorter lead time and can also be shuddered more quickly than traditional oil extraction methods, giving U.S. LTO producers an advantage in responding to shifts in demand and price.

The demand shift that has been the biggest focus of media discussion is the slowing of Chinese economic growth. This is certainly a factor in the collapse of crude prices but, probably of equal importance, is beginning shift in the oil intensity of Chinese economic growth, a process that has been underway in Western Europe and the U.S. for at least three decades. In short, the internal Saudi model of petro-capitalism is facing increasing constraints at the same time that additional competitors are entering the market.4 They will also have less money to finance institutions promoting their Salafi version of Islam in the rest of the Middle East.

In the U.S. the decade-long boom in fracking is over, although this doesn’t mean that LTO production cannot return relatively easily. However, at current price levels much of the new production — and a lot of established producers — are not profitable. Of course, when an asset-price bubble begins to burst, it is always interesting to ask about the banks that, inevitably, were drawn into the financing of the bubble. In the 2004-2014 decade, there was an eleven-fold increase in junk-bond energy debt, much of it held by oil-patch banks but also by the big names such as Goldman Sachs, J. P. Morgan-Chase and Morgan Stanley. In the opening months of 2016, many of these banks have announced an increase in their net loan loss reserves against “troubled” energy-sector debt while at the same time insisting that everything is under control and that they are not in financial trouble as ongoing institutions. The stock market has not taken these announcements favorably, and it is the finance sector that has suffered the biggest hit in prices during the opening weeks of trading in 2016. And market participants obviously get the connection: When oil prices take a hit, financial stocks follow. Oil-patch bankruptcy filings totaled 42 in 2015, with the pace accelerating in the final months of year.

To date is it probably accurate to say that the threat of defaults by energy companies does not pose the risk that the housing bubble did. We’re talking about a few $100 billion rather than a few trillion. However, the interconnections of Mideast oil, slowing Chinese growth and financial risk taking can spiral out of control with a much larger impact than any one variable suggests. As the Chinese say, “May you live in interesting times.”

Notes:

1 Down from over 45% in 1973 with much of the decline coming from a gain in coal. LNG has also grown market share but 6 of the top 10 petroleum producers are also in the top 10 LNG producers.

2 The Koch brothers made most of their huge fortunes trading, rather than producing or refining, petroleum.

3 China, however, is Saudi Arabia’s largest market.

4 The kingdom has increased the price of gasoline by 50% to about $0.90/gal and young Saudis are finding diminished government job prospects (the public sector accounts for about 80 % of Saudi citizen jobs).

Equal Pay Day

by Bill Barclay

On April 12, 2016, we’ll again reach the day of the year in which the typical woman (receiving median pay) in the U.S. will, when she adds the amount she was paid in 2015 to the amount she has been paid year-to-date, get the same amount of income that her male counterpart (receiving median pay) got in 2015. The National Committee on Pay Equity has designated this day for the past 20 years to call attention to the gender disparity in wages.

Of course, in a political economy where class, gender and race/ethnicity intersect, it can be hard to find the typical woman. So there is a question of with whom the comparison should be with. Breaking the gender pay gap down by race and ethnicity highlights some significant differences and also illustrates the intersection of various hierarchies of power. The gender pay gap is largest for white women who get only about 75% of while male pay. This larger pay gap reflects the fact that gender inequality is greatest at the top deciles of pay. These are jobs that go mostly to white workers where, although a woman may have a high paying job such as a lawyer or a medical doctor, her high-paid male counterpart got a larger starting salary that left her behind from the beginning of her career. This initial pay gap is seldom made up over the course of a career.

What is the impact of race or ethnicity? Our median-paid African American woman gets more than 80% of her African-American male counterpart. And our typical Latina is paid over 85% of her Latino counterpart. However, before we rejoice over lesser levels of gender pay inequality, let’s remind ourselves that the African American woman made only about $4 for every $5 her white sister made and $3 for every $5 the typical white male worker made. The story is even worse for our Latina woman worker who made $7 for every $10 her white sister made and only $5.50 for $10 the typical white male worker made.

The U.S. has been stuck about a 20% gender pay differential for full-time year-round workers for several years. We’ve almost come to see it as “natural,” or maybe “just the way it is.”

But, suppose our typical woman worker was in a different country. Would she have a different experience? Of course that depends on the country, but let’s consider some other wealthy societies. The table below gives the 2016 month through which our typical woman would have to work in each country to get the same amount of income that her male counterpart in that same country received in 2015. (To keep it simple the table, calculated from the Organisation for Economic Co-operation and Development, is in whole months.)

Country Equal Pay Month
UK March
Canada March
Austria March
Australia February
Sweden February
Belgium January
Denmark January
Norway January
New Zealand January

A review of the table illustrates an important point about economic inequality and gender pay gaps. The countries with the lowest gender pay gap, where the typical female worker has to work the shortest time into 2016 to catch up with her male counterpart’s 2015 wage, are also those that have done the best in terms of resisting the neoliberal policies that have increased inequality in general. Countries that have been most effective in using tax and transfer systems to counter unequal market wage outcomes are also those most successful in reducing, even though not eliminating, gender wage inequality.

And this takes us to the Sanders campaign. His Paycheck Fairness Act and his advocacy of paid parental leave are the types of policies that can close the gender pay gap. In the spirit of our independent campaign, however, I think Sanders should make explicit that paid family leave have an incentive for fraternal as well as maternal leave. This lesson was learned by several northern European countries that, as evident in the list above, perform much better on gender pay equity than the US or the UK.

Editor’s Note: In Chicago, Equal Pay Day 2016 will be highlighted by a rally at Noon on Tuesday, April 12 in Daley Plaza, Dearborn and Washington, in downtown Chicago. For more information (with links to social media) CLICK HERE.